Should You Cosign That Loan? 5 Things To Consider
Cosigning a loan or lease can be a great way to help a friend or a close relative, but it can also put your finances in serious peril.
Recently we wrote an article about how to ask someone to be your cosigner on a lease or loan. Now someone read that article and they knocked on your door, asking you to be their cosigner.
Or maybe they didn’t read the article (hard to believe since it was named “Most Famous Article Of Early July” by the Academy of Blogging Arts) but they’re asking you to be their cosigner anyway. It’s a nice thing to do, certainly, but it’s also not something that should be taken lightly.
Here are some considerations you should take into account if you’re asked to be a cosigner.
1. When you cosign a loan, you’re on the hook.
Cosigning a loan isn’t as big deal as signing a loan right? After all, the star of a movie doesn’t get paid as much as the co-star, right?
Wrong! On both counts. You really think Robert Downey Jr. isn’t pulling in the biggest check in every Marvel movie, even when he’s just flying in to make a couple quips and leave? And also, that’s not how cosigning works.
“First of all, I wish it was not called cosign because many people think it is not a big deal to help a friend or family member out by cosigning, but it can be if the account is late or not paid,” lamented nationally recognized credit expert Jeanne Kelly, (@creditscoop). “It is a joint account. You are just as responsible for this account as the person who is asking you to cosign. If you can’t afford the monthly payments nor want to pay them in case the other person stops, you might not want to cosign.”
“You may be tempted to cosign a loan for a child, family member or friend to help them get a better interest rate on a line of credit or loan. Certainly, this is a big help to someone who can’t obtain credit on their own. However, it will also result in you ultimately taking on responsibility for it. Understanding the repercussions of cosigning a loan will help you decide if it’s really the best decision for you.”
2. How will this impact your credit?
When you’re signing on to a loan, you’re putting your credit on the line as well. You probably have at least decent credit, or whoever is asking you to sign on should probably be asking someone else. But that means you have to consider whether or not your credit score can handle a potential drag.
“Cosigning a loan comes with a big risk to your credit,” advised Tayne. “Be sure to know that the loan you sign for will appear on your credit as well as theirs. It will have an impact on both your credit score—good or bad.”
And even if you aren’t worried that the person you’re cosigning for will have trouble paying, just cosigning a loan can immediately impact your score.
“The cosigner also needs to consider and be aware of that the loan is going to show up on their credit report with the full amount of the loan going against the income to debt ratio for their credit score,” explained empowerment coach Joyce Blue (@EmpoweringYouLEC). “This is important because if the cosigner is going to be wanting to buy a home or car during the time of being a cosigner, they may have a harder time accomplishing that due to the higher debt ratio.”
3. What’s the worst that could happen?
Even if the person asking you to cosign has the best intention and ability to pay off the loan, you never know what can happen. Which is why you need to know what your obligation will be if the worst happens.
“It is essential that you trust the person who you are cosigning for,” urged Tayne. “Also understand that even if they are trustworthy, unforeseen circumstances such as death, serious illness, or job loss can happen to anyone. You must accept the fact that you may become responsible for the loan at some point.
“If the main borrower defaults, the creditor can come to you for payment. This means you could be in danger of having your bank account frozen, your wages garnished, and your credit score lowered because of this defaulted loan. Failure to pay by you or the borrower can even result in collection activity, including lawsuits.”
Additionally, having your credit score tank could leave you with few borrowing options yourself. When an emergency bill arises, you could find yourself stuck with sketchy no credit check loans like payday loans, cash advances, and title loans. That’s a fate you definitely want to avoid!
4. How can you protect yourself?
Even if you do sign, there are a few steps you can take to help protect yourself.
“When a friend or family member asks you to cosign a loan or lease for them, you should know that their payment history on that loan will often reflect on your credit report as well,” said Vic Patel, founder of Forex Training Group. “As such, it is important to make sure to protect yourself while trying to help that friend or family member.”
“One of the best ways to do this is by insisting that the loan or lease payments be deducted directly from their checking account every month as an ACH payment. By doing this, the risk of damage to your own credit in the event that they miss a payment is greatly reduced.”
Kelly offered another step you should consider:
“If you decide you do want to help someone get a loan and you will cosign, my advice to you would be to make sure your address and phone number is the primary information on the account. This way you will be notified if the account is late and can take care of the payment if needed.”
5. Are there other options?
You might think there are only two options when you’re asked to be a cosigner: yes or no. And while that’s true to an extent, you could also try and help the asker to find other options. Presumably, they’re someone you care about or else you would have said “no” outright, but it’s possible you might be able to help them without cosigning.
If they need a cosigner to rent or buy a place, you could potentially help them find an open room with someone who has already signed off on a lease. If it’s a loan they need, maybe you could lend them the money, then you wouldn’t have to worry about putting your credit on the line, and they won’t have to pay any interest. Or, at least not as much interest. We won’t judge you.
Being a cosigner is a big responsibility. But as long as you consider these factors, you’ll have a good idea of whether or not it’s a responsibility you can take on. To learn more about how you can avoid major financial pitfalls, check out these related posts and articles from OppLoans:
- The Pros and Cons (and Scams) of Trade School
- Reverse Mortgages: How They Work and How to Shop For One Safely
- How to Financially Plan for Death
|Money relationship expert and self-empowerment coach, Joyce Blue is a certified Rapid Results coach. Joyce is passionate about empowering others to master their relationship with money, so all of their relationships thrive, they step into their power and fall in love with their lives. Contact Joyce at email@example.com or on Facebook and Instagram @EmpoweringYouLEC|
|Jeanne Kelly (@creditscoop) is an author, speaker, and coach who educates people to achieve a higher credit score and understand credit reporting. #HealthyCredit is her motto. As the founder of The Kelly Group in 2000 and the author of The 90-Day Credit Challenge, Jeanne Kelly is a nationally recognized authority on credit consulting and credit score improvement.|
|Vic Patel is a professional trader and financial expert. He has been trading the markets for over 20 years. He also runs a popular trading blog at Forex Training Group that helps investors and traders interested in the currency markets.|
|Leslie H. Tayne, Esq. (@LeslieHTayneEsq) has nearly 20 years’ experience in the practice area of consumer and business financial debt-related services. Leslie is the founder and head attorney at Tayne Law Group (@taynelawgroup), which specializes in debt relief.|
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